As reports of Alphabet (GOOGL) potentially flirting with a federally imposed breakup amid a Department of Justice investigation hit newswires, perhaps the most interesting separation aspect would be Waymo and its ability to compete with Tesla (TSLA) in autonomous driving unencumbered by its hulking parent.
While shares of the tech giant unquestionably hit a snag on Monday, many market minds believe a breakup could actually unlock significant value for the underlying Alphabet properties.
"Waymo would offer an instant challenge to Tesla dollars. YouTube would attract streaming dollars rushing into Roku (ROKU) , Disney (DIS) , and Netflix (NFLX) . Google Fiber presents a challenge to old-school telecom. Verily and Calico could team up and find a home in the life sciences sector," Real Money contributor Tim Collins wrote in his daily column. "I'd bet every single one of these subsidiaries would be worth more outside of Alphabet than inside the current shell."
Many on Wall Street agreed with such analysis, noting the ability for advertisers, the key revenue driver for Alphabet overall, to engage with each platform.
"We think each platform has enough scale to capture vast advertiser interest as separate entities," Bank of America analyst Justin Post said. "Alphabet's platforms generally don't compete directly, so we see less risk of new competitive margin pressure in comparison to Facebook (FB) ."
While many of the advertiser-reliant businesses appear to be resilient post-separation investments, Waymo is, in my mind, the most interesting opportunity if such a separation comes to fruition.
Vetting the Valuation
Valuations for Waymo have varied widely, from Bank of America's $57 billion to Morgan Stanley's peak bull target at $175 billion. Within that range, a would-be standalone entity would likely be the most valuable company in the auto space, even if it is only attacking it tangentially.
"We ultimately came to the conclusion that while it will take time, we will all be riding around in autonomous vehicles eventually," Action Alerts PLUS research analyst Zev Fima wrote in a white paper on the subject. "It may start with those who need it at first, perhaps because they are simply more willing to take the risk of being first in exchange for increased independence. But in time, we believe that everyone will find a reason to own one."
The new investment opportunity, aimed at a key thesis that is keeping investors abreast of the languishing Uber (UBER) and Tesla, could be extremely attractive to investors looking to leave the losing investments.
Additionally, if the Waymo business is valued appropriately upon separation, which would seem likely in the current market environment, Morgan Stanley's overwhelming bull case could entice investors. That is especially true as its balance sheet is assumed to be far healthier than either Uber or Tesla (not exactly a high bar).
"We revise our Waymo model for three emerging business models - ride sharing, logistics, licensing - and increase our enterprise value from $75 billion (ride sharing only) to $175 billion," Morgan Stanley analyst Brian Nowak wrote in a note late in 2018. "Waymo could address roughly 80% of the $3.1 trillion global freight transportation market and evolve into a logistics player for long-haul and last-mile delivery."
Safety First
The ability to tap into the logistics market is aided by Waymo's solid record in reliability and safety, which came in atop a list of autonomous vehicles in the latest California tests available.
Reports submitted to the California Department of Motor Vehicles by self-driving vehicle manufacturers during 2018 indicate that autonomous vehicles often require "disengagements," or a need for a human driver take over from automated systems.
Waymo drove 1.2 million miles in 2018, a significant increase from the 352,000 miles notched in 2017, and brought its disengagement rate down to 0.09 per 1,000 miles driven.
"It's a 50% reduction in the rate and a 96% increase in the average miles traveled between disengagements from the previous year," the company's team wrote in a blog post. "A lower rate of disengagements shows that our cars are getting better at recognizing and handling a wide variety of driving situations, including "edge cases" across the cities we've been testing in."
The encouraging safety reports from Waymo contrast sharply with the Consumer Reports writeups on Tesla, which have been scathing.
The consumer protection agency said that Tesla's navigate features "far behind a human driver's skills" and cited a number of traffic violations the system is prone to make.
"The system's role should be to help the driver, but the way this technology is deployed, it's the other way around," says Jake Fisher, Consumer Reports' senior director of auto testing. "It's incredibly nearsighted. It doesn't appear to react to brake lights or turn signals, it can't anticipate what other drivers will do, and as a result, you constantly have to be one step ahead of it."
With regulators paying close attention to safety reports, Waymo appears to be far less burdened with troublesome reports than Tesla is at present.
The comparatively more promising data on safety from California dovetails nicely with the rollout of a fleet in Arizona and Georgia, underwritten with partnerships with Walmart (WMT) and Lyft (LYFT) to apply the technology.
Tesla is currently without such headline partnerships, instead making promises of the Tesla semi overtaking the logistics market and robotaxis displacing Uber and Lyft sans any outside help.
Robotaxis and Regulation
As investors focus on Tesla CEO Elon Musk's promises for such a robotaxi program, Waymo may again be ahead.
For one, the safety factor is a key aspect seemingly settled for the technology that already appears to have a leg up in the race to regulatory approval.
The results of its tests have already helped in fact, allowing Alphabet to already operate self-driving taxis in four Phoenix suburbs.
The program, dubbed Waymo One, began taking riders to destinations in late 2018 and has gotten off essentially without a hitch. Hence the lack of media coverage for any headline-worthy crashes or mishaps.
"Six months ago, we launched Waymo One, our commercial self-driving ride-hailing service in the Metro Phoenix area," Waymo CEO John Krafcik wrote in a blog post last month. "Over that time we've grown to serve over 1,000 riders who hail Waymo cars each day to commute to and from work, bring their kids to school, get to the grocery store, and even to avoid parking at trailheads before a big run."
The key next step in the program is a play on the partnership with Lyft, allowing the company to tap into the ridesharing company's large installed base of users to test vehicles.
Waymo anticipates deploying 10 new driverless vehicles in coming months, building out a proof of concept long before Tesla's audacious 1 million robotaxi promise has sniffed regulatory approval.
With over $100 billion in cash on hand at the Alphabet parent, a significant cushion could be offered to Waymo that is currently unavailable to its major competitors in the robotaxi conversation.
Given the capital insensitivity of the futuristic field, the downside to the program as it works out kinks alongside Lyft is more insulated through this lens.
Chip Challenge
To be sure, Tesla bulls have argued that the race to full self driving (FSD) ultimately comes down to the semiconductors underwriting the technology.
ARK Invest analyst James Wang, a prominent Tesla bull, argued that Tesla is years ahead on this aspect.
Having formerly been an employee at Nvidia (NVDA) , Wang speculates that Tesla is at least a few years ahead of his former firm's Orin chip offering that is expected in upcoming years. That would likely put it ahead of Intel's (INTC) Mobileye chips by an even larger distance.
"By bringing chip-design in-house, Tesla has leapfrogged the automotive industry by four years," Wang argued. "Tesla's FSD is effectively an Orin-class product shipping today rather than in 2023."
His fellow analyst Tasha Keeney has also been supportive of Musk's criticisms of LiDAR as a "fool's errand."
It is worth noting that this argument has been widely rejected by both Wall Street analysts and technology experts.
"We continue to believe that Lidar is a good complement for cameras, radar, and ultrasonic sensors, and that the ultimate Level 5 winners are combining all of these sensors using sensor fusion," Cowen analyst Jeffrey Osborne wrote in a recent note. "Tesla's rejection of the technology as a 'fool's errand' due to the currently high additional expense is likely penny-wise but pound foolish."
Still, given Waymo has been working on FSD for about 10 years with its differing approach to technology, there is reason to be cautious on its ability to ramp up to autonomous driving before a fast-moving company like Tesla begins to nip at its heels.
Flirting With the Fanbase
For now, especially as Tesla stock sinks to its lowest level in years, essentially wilting under considerable debt and bad press, Waymo's lead feels comfortable enough. That is especially so as questions from analysts over Tesla's ability to sustain a business to the finish line of chip production come to the fore.
As Tesla stock continues to tread water, Waymo appears to be putting its foot on the gas. The key factor as separation anxiety takes hold of the market, is that it could lure a significant portion of Tesla's loyal fan-base betting on FSD to another partner.
Tesla's fanbase is extremely loyal and it would take quite the opportunity to convince shareholders to consider alternatives to Elon Musk's empire. However, given the data coming through from Waymo, a separation of the entity from Alphabet to directly compete could be the best option for the troubled Tesla shareholders.
